By coinnews 
00:00 Speaker A
Financial services company Empower, which oversees $1.8 trillion in 401k type plans for 19 million people, is offering something new for your retirement accounts: private markets investments. The firm announcing assets like private credit and real estate will be available in some of the accounts it administers later this year. So what does this mean for the larger 401k landscape, and do you want alternative assets in your retirement account? Here to react is Bob Powell, editor and publisher of Retirement Daily, and host of Yahoo Finance’s Decoding Retirement video podcast. So Bob, this has been described as a big opportunity to get private investments into the hands of individual investors. So to start, can you break down what exactly we mean by private investments and how do they differ from more traditional public market options?
01:19 Bob Powell
Yeah, so it’s really simple, Ali. Think of private equity investing in companies that are not listed on the public stock exchanges, like the New York Stock Exchange, or in the case of private credit, you, as an investor, are loaning money directly to a company, as opposed to a bank loaning that company money. And and there’s a couple reasons why this trend is going on, Ali, that is worth mentioning. Uh, one is the number of publicly traded companies on the New York Stock Exchange, for instance, is declining, but the number of private companies is on the rise. And it’s also, it’s part of a larger trend that’s been going on for decades in the financial services industry, which is, we’re looking at the democratization of investing. And so heretofore, individual investors were not able really to invest in private assets, private equity, private credit, private real estate. But over time, now we’re seeing the democratization of these investments such that they’re now being made available to average investors, whereas in the past they were only available to pension plans and endowment funds.
02:55 Speaker A
And it’s interesting, Bob, because there are various types of thinking here, and let’s start with the potential upside. What’s the advantage of holding private assets within your 401k?
03:07 Bob Powell
Sure, Ali, there’s three things that you need to think about. One would be that there’s a higher return potential. In the case of private equity, you might see returns in excess of, say, 16%, where the long-term average for publicly traded companies might be 10 to 12%. Uh, investing in these investments also gives you the opportunity for greater diversification. These investments tend not to move in lockstep with publicly traded stocks or publicly traded bonds. And then, you know, faster growth. There’s an opportunity for your retirement account to grow that much faster, for you to accumulate that much larger of a nest egg for retirement. But there are downsides.
04:12 Speaker A
Well, let’s let’s talk about those downsides. Why is it a risk?
04:16 Bob Powell
Well, these investments are complex and they tend to be illiquid. So unlike mutual funds or ETFs where you have the ability to trade daily or on the minute or on the second, uh, your investment is largely locked up, and oftentimes you can’t access the money in a private equity or private credit fund, or private real estate fund only on the quarter, typically. And then there’s the issue of higher fees. These have higher fees than your typical mutual fund or ETF. And there’s less transparency. With a publicly traded company, you’re getting reports that they have to submit to the SEC, 10Qs, 10Ks, etcetera. Um, these private companies are not subject to the same disclosure rules that publicly traded companies are.
05:21 Speaker A
So given these risks and rewards, how should investors think about whether and how much to allocate to these alternative assets within a 401k or retirement portfolio?
05:35 Bob Powell
Yeah, so I think the big question for me is always, what is the risk that you’re taking in order to get the return? What’s the risk-adjusted performance? So think carefully about that, and think carefully about, like, how these investments fit in with your overall goals and whether the costs and the risks that are associated with it justify the investment. Now, if you’re investing in a target date fund, it’s likely that the percent allocated to these investments would be maybe minor, 5%. But in the case of Empower, they’re going to be offered through what are called managed accounts. And there, you may have the opportunity to invest from, say, 5 to upwards of, say, 20%. And so you just really need to understand what risk are you taking in order to get the return that you desire.